Created
: 2024.04.30
2024.04.30 17:08
The Pound Sterling (GBP) edges down from a two-week high of 1.2570 but holds above the psychological support of 1.2500 against the US Dollar (USD) in Tuesday's London session. The GBP/USD pair comes under pressure as investors await the US Federal Reserve's (Fed) monetary policy announcement on Wednesday for fresh guidance.
A data-packed week in the United States will keep the US Dollar on tenterhooks. On the other side of the Atlantic, the United Kingdom's economic calendar is light. Therefore, market speculation for the Bank of England's (BoE) interest rate policy on May 9 will guide the Pound Sterling. The BoE is expected to maintain the status quo, but guidance on interest rates is expected to be slightly on the dovish side.
BoE Governor Andrew Bailey is confident about a sharp decline in the headline inflation of April and sees market expectations for two or three rate cuts this year as reasonable. Also, BoE Deputy Governor Dave Ramsden has predicted that risks of inflation remaining persistent have receded. The BoE could shed more light on the time frame from when it could start reducing interest rates. Market participants remain divided between June or August meetings from when the BoE could pivot to interest rate cuts.
The Pound Sterling falls from a two-week high of 1.2570 against the Greenback. The GBP/USD pair struggled to extend its upside reaching the breakdown region of the Head and Shoulder chart pattern formed on a daily timeframe. The Cable witnessed a sharp fall after breaking below the crucial support of 1.2535 on April 12, but it has recovered recent losses since then.
Cable's near-term outlook has improved as it trades comfortably above the 20-day Exponential Moving Average (EMA), which is around 1.2516.
The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting a consolidation ahead.
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve 'price stability', or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England's target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects - a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets - usually government or AAA-rated corporate bonds - from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Created
: 2024.04.30
Last updated
: 2024.04.30
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